How The Economist’s Big Mac Index has gobbled up the financial world

The Big Mac Index, compiled by The Economist, takes the biggest symbol in fast food and uses it to measure the power of the world’s currencies. Metro examines what ‘burgernomics’ says about Britain’s economy.

In France, they call it Le Big Mac Index… (Picture: Alamy)

Would you like fries with that? Or will you be having the fiscal stimulus instead?

As well as having an effect on your appetite, the Big Mac also has a say on the economy.

McDonald’s signature burger has been used to measure the interplay between the world’s currencies for 26 years.

The Big Mac Index was established by The Economist in 1986 as a fun way of examining if currencies were at their correct level. Based on the notion that a dollar should buy the same amount in all countries, the index roughly measures the purchasing power parity (PPP) between two currencies. PPP adheres to the notion that exchange rates should adjust to make goods the same price in each country.

The goal of the Big Mac Index was to ‘make exchange-rate theory a bit more digestible’. Burgernomics, as The Economist dubbed it, was born. The index was invented by one of the magazine’s writers, Pam Woodall.

As well as charting the prices of Big Macs all around the world – at the moment the most expensive is in Venezuela, the cheapest in Hong Kong, while British Big Macs are somewhere in the middle – the index calculates the value of the world’s currencies in relation to the US dollar.

In the most recent report of the index at the end of last month, The Economist had words of warning for Britain, where a Big Mac costs £2.69, or $4.16 compared to $4.33 in the US.

‘The British pound is a shadow of its former self,’ it said. ‘Since 2007 it has moved from 18 per cent overvalued to four per cent undervalued.’

Mac attack… Click the link below to see the numbers behind the burgers

While we may be beating our Australian rivals in the Olympics medal race, they have turned the tables on us economically, The Economist said, as the Australian dollar has gone from being 14 per cent undervalued in comparison to the US dollar in 2007 to eight per cent overvalued.

‘Britain’s experience has been the opposite of Australia’s,’ said the magazine. ‘Its financial industry, a big chunk of the overall economy, was at the heart of the financial turmoil (the pound depreciated sharply in 2008) and its biggest export market, the euro zone, is in a dreadful mess.’

The Economist said countries at the bottom of the index can take the positives, however, as a cheap currency makes exports attractive to foreigners.

It said: ‘China manages its currency using exactly this logic: to keep the yuan cheap and demand for yuan-priced exports high.’

Jonathan Perraton, senior lecturer in economics at the University of Sheffield, told Metro this was an important talking point raised by the Big Mac Index, as there are tensions between the Chinese and the Americans over currency values.

‘Strategically, the issue is whether countries like China have been artificially keeping their currencies at a low level, so they’ve been keeping their goods artificially cheap and maintaining their competitiveness that way,’ he said.

Mr Perraton said the index had other uses. ‘Companies may want to compare cost levels in different countries,’ he said. ‘If you’re paying people allowances with international business travel, you want a rough idea of how much it costs in different countries.’

He said the Big Mac Index was a good rough guide to the fluctuations between currencies.

‘It’s quite fun, easy to explain and understand. It provides an easy to estimate, rough and ready comparison of prices.

‘If you want a quick and easy way to make a rough comparison of prices in different countries then it’s pretty good and pretty useful. If you want something that’s more accurate and more in-depth, it does have a lot of limitations. If you want a back of the envelope, ball park figure, it does the job pretty well.’

Mr Perraton said the index cannot be totally accurate, however. ‘The main drawback is that there are key costs that will differ systematically across countries and will be reflected in the price – rents and wages will tend to be lower the poorer the country, so wages for McDonald’s workers doing the same job vary widely across countries, roughly mirroring differences in countries’ level of income.’

He said the index worked on the theory that in a global marketplace things ought to cost roughly the same across the world. He added that the burger it is named after was chosen for its ubiquity.

‘Obviously, the Big Mac is pretty much the same thing wherever you go and so it’s a good benchmark to see how far PPP really does hold, if things really do cost the same the world over,’ he said.

‘They’re eaten everywhere. It’s essentially the same product everywhere. So many things just aren’t the same.

‘If you look at the headline index they use for measuring inflation rates – which is a basket of different goods – different countries consume different sorts of goods.

‘For something like cars, obviously an Audi is different than a Peugeot and so on. It’s quite hard to compare across countries if you look at different baskets of goods because goods vary by brand and type.’